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Shaking the Foundations – Interest Only a thing of the past…

interest only mortgages going?Thoughtless Politicians Are Closing Interest-only –  A Mortgage Lifeline For Many Proud Home-Owners, Says Simon Webster. Will Anybody Gain?

 

As the architects of recent financial services regulation gaze upon the splendid views from their private sector offices in the better parts of the city, I hope they manage to spare a thought for the thousands of people who are being quietly rendering homeless by the legacy of their mortgage regulation?

There are literally thousands of people with interest-only mortgages that are now coming to an end, and who will soon have to sell up, move down or move into rented accommodation. And thousands more who would prefer to remortgage, but who are trapped on uncompetitive rates. Those in search of a better rate must either switch to vastly more expensive repayment alternatives or stay on their existing, higher rates.

Interest-only was effectively killed by the powers that be. I want to ask why?

‘Regulatory Social Engineering’

New clients, John & Jenny, visited my office recently. They had had an interest- only mortgage of £50,000 outstanding on their £300,000 home. It is due for repayment next year. He is making currently making less than £20,000 a year, she doesn’t work, and they have only modest pensions. They are both 63.

Before the death of interest-only, they could almost certainly have extended their loan to age 70 or 75 – they can afford it on interest-only, even if rates go up by 2 or 3%. They could even have made some dent in the capital. But now, unless the lender agrees to extend (and we wait to hear on that point), they may well have to sell the home they have lived in for 24 years – the one in which they raised their kids – just to cater for a bit of regulatory social engineering.

I have broached the subject of equity release with them, but the rates are double what they would pay on a traditional mortgage, so that is not hugely attractive. But, since they own their home, they do at least have some options.

Indeed, the options flowing from home ownership are really the point of this piece. The single most valuable asset of almost every client I see is their home. A £100,000 property held over 25 years at just 3% growth is ultimately going to be worth just shy of £210,000. The question facing our society is this: who’s going to have that value? Private landlords – the haves? Or those struggling to get on the housing ladder – those who clearly have not?

Stupidity On Stilts

Clearly, John & Jenny’s financial boil must be lanced at some stage, and it could be argued that kicking a 70 or 75 year old onto the street because they cannot afford to clear their mortgage is even less socially desirable than doing the same thing to a 64 year old. But at 75 the overall cost of equity release would be a lot less than the cost at 64.

Had my clients lived in rented accommodation, they might well have qualified for housing benefit on retirement, and they would have had their rent paid for them. But as homeowners, they could have been self-sufficient if the deck had not been retrospectively stacked against them.

Over the longer term, all those who cannot afford to buy will rent. They will probably spend the money that they would otherwise have saved within their homes, and they will end up on benefits. This means either that the rest of us will have to pay more tax, or benefits for all will be cut.

I am not a socialist, but I do consider myself an economist. At the macro level, the European parliament is forever kicking the can down the road. That seems to be all fine and dandy for the political classes: but it’s the end of the line for an awful lot of others.

Simon Webster is the Managing Director of Facts & Figures Financial Planners Ltd

Editor’s note: Under the Mortgage Market Review, interest-only mortgages are due to come under sharply tightened affordability assessments from 26th April 2014. And the European Mortgage Credit Directive, which is currently nearing finalisation, comes into effect in Q1 2015 and is likely to tighten the rules still further. Meanwhile, for lenders, the ability to rely on projections of increasing value is also being severely curtailed.

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